RBS 2012 Annual Report Download - page 370

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Accounting policies continued
25. Share-based compensation
The Group operates a number of share-based compensation schemes
under which it awards RBSG shares and share options to its employees.
Such awards are generally subject to vesting conditions: conditions that
vary the amount of cash or shares to which an employee is entitled.
Vesting conditions include service conditions (requiring the employee to
complete a specified period of service) and performance conditions
(requiring the employee to complete a specified period of service and
specified performance targets to be met). Other conditions to which an
award is subject are non-vesting conditions (such as a requirement to
save throughout the vesting period).
The cost of employee services received in exchange for an award of
shares or share options granted is measured by reference to the fair
value of the shares or share options on the date the award is granted and
takes into account non-vesting conditions and market performance
conditions (conditions related to the market price of RBSG shares): an
award is treated as vesting irrespective of whether any market
performance condition or non-vesting condition is met. The fair value of
options granted is estimated using valuation techniques which
incorporate exercise price, term, risk-free interest rates, the current share
price and its expected volatility. The cost is expensed on a straight-line
basis over the vesting period (the period during which all the specified
vesting conditions must be satisfied) with a corresponding increase in
equity in an equity-settled award, or a corresponding liability in a cash-
settled award. The cost is adjusted for vesting conditions (other than
market performance conditions) so as to reflect the number of shares or
share options that actually vest.
If an award is modified, the original cost continues to be recognised as if
there had been no modification. Where modification increases the fair
value of the award, this increase is recognised as an expense over the
modified vesting period. A new award of shares or share options is
treated as the modification of a cancelled award if, on the date the new
award is granted, the Group identifies them as replacing the cancelled
award. The cancellation of an award through failure to meet non-vesting
conditions triggers an immediate expense for any unrecognised element
of the cost of an award.
26. Cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises cash
and demand deposits with banks together with short-term highly liquid
investments that are readily convertible to known amounts of cash and
subject to insignificant risk of change in value.
Critical accounting policies and key sources of estimation
uncertainty
The reported results of the Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. UK company law and IFRS require the directors, in preparing
the Group's financial statements, to select suitable accounting policies,
apply them consistently and make judgements and estimates that are
reasonable and prudent. In the absence of an applicable standard or
interpretation, IAS 8 ‘Accounting Policies, Changes in Accounting
Estimates and Errors’, requires management to develop and apply an
accounting policy that results in relevant and reliable information in the
light of the requirements and guidance in IFRS dealing with similar and
related issues and the IASB's ’Conceptual Framework for Financial
Reporting’. The judgements and assumptions involved in the Group's
accounting policies that are considered by the Board to be the most
important to the portrayal of its financial condition are discussed below.
The use of estimates, assumptions or models that differ from those
adopted by the Group would affect its reported results.
Pensions
The Group operates a number of defined benefit pension schemes as
described in Note 4 on the accounts. The assets of the schemes are
measured at their fair value at the balance sheet date. Scheme liabilities
are measured using the projected unit credit method, which takes
account of projected earnings increases, using actuarial assumptions that
give the best estimate of the future cash flows that will arise under the
scheme liabilities. These cash flows are discounted at the interest rate
applicable to high-quality corporate bonds of the same currency and term
as the liabilities. Any recognisable surplus or deficit of scheme assets
over liabilities is recorded in the balance sheet as an asset (surplus) or
liability (deficit).
In determining the value of scheme liabilities, financial and demographic
assumptions are made including price inflation, pension increases,
earnings growth and the longevity of scheme members. A range of
assumptions could be adopted in valuing the schemes' liabilities. Different
assumptions could significantly alter the amount of the surplus or deficit
recognised in the balance sheet and the pension cost charged to the
income statement. The assumptions adopted for the Group's pension
schemes are set out in Note 4 on the accounts, together with sensitivities
of the balance sheet and income statement to changes in those
assumptions.
A pension asset of £144 million and a liability of £3,884 million were
recognised on the balance sheet at 31 December 2012 (2011 - asset
£188 million, liability £2,239 million; 2010 - asset £105 million, liability
£2,288 million).